Georgia Election Strong Data

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The Democratic sweep in the Georgia Senate runoff election was viewed as unfavorable for mortgage rates. While Friday’s labor market report was mixed, this week’s other major economic data was very strong, which also was negative for rates. As a result, rates rose a little, but remain near record low levels and are roughly a full point lower than a year ago.

The Democrats won both Senate seats in Tuesday’s runoff election in Georgia, giving them control of both the Senate and the House. Investors expect that this will lead to increased government spending and that additional bonds will need to be issued to fund the spending, which will push bond yields higher. 

Friday’s key Employment report from the Bureau of Labor Statistics contained mixed results. In December, the economy lost 140,000 jobs, below the consensus forecast for an increase of 75,000, and the first monthly decline since the unprecedented job losses in March and April caused by the partial shutdown of the economy. By far the hardest hit sector was hospitality, which was hurt by the spread of the coronavirus. 

The other major areas of the report contained more optimistic news. Expected to rise to 6.8%, the unemployment rate stayed flat at 6.7%. Average hourly earnings, an indicator of wage growth, rose 0.8% from November, far above the consensus for an increase of just 0.2%, and were an impressive 5.1% higher than a year ago.

A couple of other significant economic reports released this week from the Institute of Supply Management (ISM) displayed unexpected strength. The ISM national manufacturing index jumped to 60.7 in December, well above the consensus forecast of 56.5, and the highest level since August 2018. Since many consumers are spending less money on travel and leisure activities due to the pandemic, they are buying more goods, which has boosted the manufacturing sector. Similarly, the ISM national services index rose to 57.2, well above the consensus forecast of 54.5, and near the levels seen early in the year prior to the pandemic. Readings above 50 indicate that the sector is expanding. 

Looking ahead, investors will continue watching Covid case counts and vaccine distribution. The Consumer Price Index (CPI) will come out on Wednesday. CPI is a widely followed monthly inflation report that looks at the price change for goods and services. Retail Sales will be released on Friday. Since consumer spending accounts for over two-thirds of all economic activity in the US, the retail sales data is a key indicator of growth.